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Estimating complex production functions: The importance of starting values

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  • Neal, Mark

Abstract

Production functions that take into account uncertainty can be empirically estimated by taking a state contingent view of the world. Where there is no a priori information to allocate data amongst a small number of states, the estimation may be carried out with finite mixtures model. The complexity of the estimation almost guarantees a large number of local maxima for the likelihood function. However, it is shown, with examples, that a variation on the traditional method of finding starting values substantially improves the estimation results. One of the major benefits of the proposed method is the reliable estimation of a decision maker's ability to substitute output between states, justifying a preference for the state contingent approach over the use of a stochastic production function.

Suggested Citation

  • Neal, Mark, 2007. "Estimating complex production functions: The importance of starting values," Risk and Sustainable Management Group Working Papers 151178, University of Queensland, School of Economics.
    • Handle: RePEc:ags:uqsers:151178
    DOI: 10.22004/ag.econ.151178
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    References listed on IDEAS

    as
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    9. Tonsor, Glynn T. & Kastens, Terry L., 2006. "How Much Do Starting Values Really Matter? An Empirical Comparison of Genetic Algorithm and Traditional Approaches," 2006 Annual meeting, July 23-26, Long Beach, CA 21252, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
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    Production Economics; Risk and Uncertainty;

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